Late in July, I suggested FTSE 250 housebuilder Bellway (LSE: BWY) shares might be worth watching in August as it provided the market with its latest trading report. That update has duly arrived and the shares have moved lower, albeit perhaps not as much as some doomsayers were predicting.
For me, this fairly muted reaction suggests that the shares are firmly in bargain territory.
Down, but not out
Let’s look at those headline numbers. Housing revenue for the full year to 31 July is expected to come in “around £3.4bn“. That’s down slightly from the previous year, albeit in line with previous guidance from the company.
In a similar vein, the number of completions and average selling price both fell by low single-digit percentages. Operating margins declined as well, partly due to higher building costs and the need to offer incentives to get buyers through the door.
Not great, but hardly a disaster.
Economic uncertainty bites
Notwithstanding this, some of the other numbers were more worrying. There was, for example, a big drop in the overall reservation rate. This reduced to 156 homes a week — a 28.4% reduction from the previous year.
The average private reservation rate fared even worse, falling just under 36% to 109 homes a week. This has pushed Bellway to focus more on constructing social homes to offset the weaker demand.
Of course, there are no prizes for guessing what’s caused all of this, namely the cost-of-living crisis and higher mortgage interest rates. The end of the Help-to-Buy scheme in England in March hasn’t helped either.
Is the worst over?
As someone who recently began building a position in another housebuilder, I’m continually asking whether we’ve reached ‘peak pessimism’.
Not according to Bellway’s CEO Jason Honeyman. He believes trading is “likely to remain challenging in the near term.” In fact, the company expects legal completions to “decrease materially” in the new financial year.
This undoubtedly makes sense, especially as at least one more hike to interest rates is on the cards. Stubbornly high inflation could also continue impacting margins.
On the flip side, there’s still a lot to like from an investment perspective.
Reasons to be cheerful
For one, Bellway’s finances look solid. Net cash of £232m at the end of July is evidence of that. A reduction in headcount, mentioned in Wednesday’s update, will no doubt help.
Like many of its peers, the company has a decent land bank to fall back on too. Elsewhere, an order book of 4,411 homes, while greatly reduced from 7,223 in the previous year, feels adequate given current headwinds.
For me, a lot of the bad news is also reflected in the valuation.
Bellway shares trade on a price-to-book ratio of just under 0.8. That’s cheap at face value, both relative to the market as a whole and the industry.
A chunky 6.4% dividend yield (based on a likely total cash return of 140p per share) is another attraction.
I’d buy
Times are certainly tough in the housing sector and today’s update from Bellway only underlines this. Even so, I feel that the risk/reward trade-off looks increasingly compelling for patient investors.
A once-in-a-decade opportunity then? Quite possibly.
If I didn’t already own one of its peers, I’d have no qualms about buying here.
